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EPC contract for development/upgradation of Integrated GAS surface facilities

ARA, Rajasthan has pronounced judgment on 13.9.2021, in the case of Petrofac International, Barmer (2021) 36 J.K.Jain’s GST & VR 347, that;

Classification of Services─The EPC contract for development/ upgradation of Integrated GAS surface facilities, qualifies as Composite Supply under “work contract” and attract GST @18% under S.No.3-Heading 9954(ii) of the notfn  No. 11/2017-CT(R) dated 28.6.2017

1.Background.─The applicant is required to undertake various activities comprising of Pre-bid engineering, site surveys, verification of soil and topography data, Feed, Detail Engineering, Procurement, Fabrication, Manufacturing, Assembly, Inspection & Testing, Packing, Shipping, Site establishment, Delivery and unloading at site, Storage and preservation, complete erection and Installation, Facilities construction, Pipeline laying, Insulation, Painting, Dismantling, removal and disposal of existing facilities, Hook-ups, Site Acceptance Testing, Pre commissioning & commissioning RFSU, performance guarantee test Run, Training of Company’s commissioning & operations personnel, Project & construction management Interface, Management (Internal & External) by Interface Management team and satisfactory hand over of complete RDG Gas Processing Terminal, including roads and drain within RDG Terminal, Intrafield pipeline, irrigation water pipeline, approach Roads between well pads, forming an integral part of RDG project, Complete in all aspects and various infrastructure facilities all customized as per contract.

The applicant has contended that under the EPC contract they are providing Engineering, Procurement and construction (EPC) services in relation to the upgradation of certain facilities of the Raageshwari Deep Gas field within RJ-ON-90/1 Block located in Barmer District in the State of Rajasthan operated by Vedanta for carrying out petroleum operations. Since services are in the nature of support in upgradation of facilities Provided by the applicant to Vedanta, it aptly merit classification as “Support-services to mining” as per heading 9986 of the Sr.No.24(ii) per notfn  No. 11/2017-CT(R) dated 28.6.2017 (as amended). The applicant further contended that alternatively the supply of services by them should be classified as other professional, Technical and Business services relating to exploration, mining or drilling of petroleum crude or natural gas or Both under Heading 9983 of Sr. No. 21(ia) of the Rate notfn  No. 11/2017-CT(R) dated 28.6.2017(as amended).

2. Findings by ARA.─Now the issue to be decided whether the supply to be made by the applicant under the EPC contract awarded to them would be classified as “Support services to mining or other Professional, Technical & Business services relating to exploration, mining or drilling of Petroleum Crude or Natural Gas or Both or otherwise in any other service”.

Support services to exploration, mining or drilling of Petroleum crude or natural gas are classified under heading 9986. The explanatory Note to service code 998621 provides the scope of the said entry i.e., Support Services to Oil & gas extraction, which is reproduced below:–

“This service code includes derrick erection, repair and dismantling services, well casing, cementing, pumping, plugging and abandoning of wells, test drilling and exploration service in connection with petroleum and gas extraction, specialized fire extinguishing services, operation oil or gas extraction unit on a fee or contract basis. This service code does not include geological, geophysical and related prospecting and consulting services”.

From the explanatory note it reveals that Support Services shall include the services to be provided for exploration, once the infrastructure/facility for Exploration is built & complete in all respect and ready to start exploration. But it does not include the services to be provided before creating the infrastructure/facility. Under the EPC contract the applicant has to undertake activities from site survey, Designing, Engineering, Procurement, construction of customised facility, commissioning of permanent facility, Test run and hand over of complete facility so designed, constructed, tested & commissioned. Thus it can not be treated as support services to oil & gas extraction.

Similarly, other professional, technical & business services are classified under heading 9983. The heading covers other Professional, Technical and business services relating to exploration, mining or drilling of Petroleum crude of natural gas or both. This heading covers “pure services” of other Professional, technical & business related and not the services provided under a EPC contract which include Engineering, Procurement & Construction. As discussed in Para 5 above, The applicant has to undertake the site survey, Designing, Engineering, Procurement, construction of customised facility, Commissioning of permanent facility, Test run and hand over of complete facility so designed, constructed, tested & commissioned. Thus it cannot be classified as other professional, Technical and Business services relating to exploration, mining or drilling of petroleum crude or natural gas or Both.

3. Analysis by ARA.─In view of the above it is clear that the services provided by the applicant neither fall under “Support services to exploration, mining or drilling of Petroleum crude or natural gas nor other professional, technical and business services relating to exploration, mining or drilling of Petroleum crude or natural gas or Both.

As per EPC contract the applicant has to complete the task of setting up of a project broadly ranging from Survey, investigation, designing, “engineering, procurement, fabrication, manufacturing, assembly, erection and installation, facilities construction, Pipeline laying, insulation dismantling, removal & disposal of existing facilities, Testing, Pre commissioning & Commissioning, Training etc. & satisfactory hand over of complete RDG gas processing Terminal, including Roads & drains, pipeline approach roads between well pads & various infrastructure facilities, all commissioned as per contract. The applicant has to start from the scratch and bring into existence a fully operational RDG gas Processing Terminal. The execution of the project would also involve the transfer of property in goods.

In light of these fact, the ARA examined the definition of “work contract” as provided u/s 2(119), CGST Act 2017, which reads as under:

(119) “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract;

The contract is for the engineering, procurement and commissioning of RDG gas Processing Terminal including Roads & drains, pipeline & various infrastructure facilities, all commissioned. What would be transferred is the project including the civil work and land involved in project. Various civil structure would be created and various equipment would be installed.

The said project cannot be shifted anywhere, it is essentially of the nature of immovable property. The project after completion at the time of transfer will be an immobile property. It is thus, the ARA are of the considered view that the work specified in the EPC contract qualifies as “work contract” and will be taxed accordingly.

According to S.8 of CGST Act, 2017, the tax liability on a composite or a mixed supply shall be determined in the following manner, namely:–

(a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply, and

(b)……………………………………………………………

As per S.2(30) composite supply is defined as “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;

Further principal supply is defined u/s 2(90) as “principal supply” means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary;

Further, as per Para 6 of Schedule-II,

Composite supply─The following composite supplies shall be treated as a supply of services, namely:–

(a) works contract as defined in clause (119) of section 2:

However, since composite supply of works contract has been explicitly classified as supply of service under Schedule II, the concept of works contract follows that;–

a. Works contract in itself is a composite supply in which construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, commissioning etc. are involved along with transfer or property in goods.

b. Under GST, as per definition of works contract service if construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning is for immovable property, then it will be classified as works contract.

Further, we observe that the activity proposed to be undertaken is a composite supply of works contract, the rate of tax in given service shall be determined in accordance with the notfn  No.11/2017-CT(R) dated 28.6.2017, as amended from time to time.

The relevant portion of the S.No.3 (Heading 9954) (ii) of the notfn  No.11/2017-CT(R) dated 28.6.2017 (as amended) is as under:–

CGST SGST IGST
Heading 9954 (Construction services) (ii) Composite supply of works contract as defined in S.2(119), CGST Act, 2017 9% 9% 18%

4. Conclusion by ARA.─In view of the above we find that services provided under EPC contract awarded to the applicant by M/S Vedanta for setting up of a project broadly ranging from survey, investigation, designing engineering procurement, fabrication, manufacturing assembly, erection & installation, facilities construction, Pipeline laying. insulation, dismantling & removal & disposal of existing facilities, Pre commissioning & Commissioning training etc. and hand over of complete RDG gas Processing terminal including roads & drain, pipeline, approach roads between well pads and various infrastructure facilities as per contract, it is a “work contract” of composite supply. The composite supply is a mixed of goods & services and would be taxed accordingly under S.No.3 Heading 9954(i) of notfn  No.11/2017-CT(R) dated 28.6.2017 and GST @18 % (CGST+SGST) is payable.

5. Ruling by ARA.─Based on the above discussion & finding the ARA ruleed as under:–

Question A : Whether the Services provided by the applicant are classified under S.No.24(ii) of Heading 9986 of the notfn  No.11/2017-CT(R) dated 28.6.2017 (as amended) as ‘Support Services to exploration, mining or drilling of petroleum crude or natural gas or both’ and attract GST @ 12%.

Answer: No.

Question B: Whether the Services provided by the applicant are classified under ‘other professional, technical and business services relating to exploration, mining or drilling of petroleum crude or natural gas or both under S.No.21(ia) of Heading 9983 of the notfn  No.11/2017-CT(R) dated 28.6.2017 (as amended) and attract [email protected]%.

Answer: No.

Question C: Further, if the subject services are not classifiable under the aforesaid entry, what would be the appropriate classification for the same and what rate GST would be imposable.

Answer: The activities of supply survey, designing, installation, Commission of Project under EPC contract by the applicant shall attract [email protected]% (9% CGST and 9% SGST) under S.No. 3 Heading 9954(ii) of the notfn  No.11/2017-CT(R) dated 28.6.2017.

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